Calif. City Heading To Bankruptcy Court

Calif. city set to become nation's most populous to enter bankruptcy, but creditors challenge

But the holders of the biggest share of the debt were the companies that in 2007 insured nearly $165 million in pension bond obligations to allow the city a lower interest rate and make them stable for investors. They were unable to negotiate a deal and want the city to avoid bankruptcy, which would likely allow Stockton to avoid repaying the debts in full.

Officials for the largest creditor, Assured Guaranty, said the city offered them 17 to 18 cents on the dollar for bonds that run through 2048, a deal they plan to argue in court is unacceptable. They say the city should further cut costs and raise taxes and point to city subsidies for the arena and $7 million in uncollected parking tickets.

City politicians also lack the political fortitude to cut contributions to CalPERS, the public employee pension program, Assured officials say. Employees who shared in the wealth when times were flush ought to sacrifice when they are not, they say.

Stockton wants to cut its repayment of the pension bonds without reducing the liability itself, the attorneys wrote.

Those opposing bankruptcy say the city needs long-term wage concessions from public employees, not the one- and two-year deals that were negotiated. The pain must be shared among all debt holders, they argue.

"Stockton has budgeted itself into insolvency. It is now trying to cram down a plan on those it did not favor, instead of focusing on creating a fair, equitable and long-term plan for all stakeholders," said Robert Tucker, managing director of Assured Guaranty.

Few people doubt the city will be successful at a four-day trial and enter bankruptcy, but that won't be the end of litigation. If Chapter 9 protection is approved, a federal bankruptcy judge would still have to decide whether Stockton's bankruptcy plan is fair, or whether it singles out some groups to bear more of the financial burden than others.